International Banking Changes and Effects on Risk and Contagion
In this context, an international bank is a financial institution which provides financial services including credit opportunities and payment accounts to customers in other foreign countries. The foreign clients can be people and other firms. Notably, each international bank has its own rules and policies outlining with whom and how to undertake business. This means that international banking exists to assist in facilitating international business. According to Buch and Goldberg (2015), international banking encounters changes as a result of the existence of complexities in the provision of services. They also have representatives who serve their clients out of their domestic countries. The other form of the international bank is subsidiaries and affiliates. Subsidiary banks are incorporated in one country which is owned by a parent bank in another foreign country, either wholly or partially.
Affiliate banks are similar to subsidiary banks except that they operate independently of the parent banks. Also, in international banking, affiliate banks are different from subsidiary banks because the former cannot be wholly owned but can only be partially owned by a parent bank. There have been the formulation of strict rules and regulations to guide activities in cross-border bank lending (Frieden, 2015). This has triggered complexities in cross-border financing within companies because each inter-company loan which crosses national borders is subjected to tax consequences. This takes place even when the credit or loans are extended by third parties such as a bank in the domestic country. The changes in cross-border lending are triggered by transformations in financial regulations. This is because stronger financial institutions and increased formulation of rules may channel foreign capital to a specified foreign market.
This means that international banks have adopted the changes presented by new technologies (Martins, Oliveira, & Popovic, 2014). The rationale for technological innovation in international banking is that the technologies enable banks to overcome the tradeoff between the provision of good services and minimization of operating costs. Embracing technological innovations in international banking is appropriate because the banks can rely on several principles for incorporating cost reduction programs and sustaining their gains. The change to technological innovation in international banking takes place in various forms (Steger, 2017). In general, the methodologies of technological innovation change the way in which information is shared, and money handled in the international banking platform. The shift in upgraded ATMs allows people to transact through the use of biometric authentication in their smartphones.
The change has allowed international banks to seek the services of biometric security system services providers. “Apple Store-style” Experience The other change being embraced in international banking regarding technological innovation is that of the Apple-store style experience. This change is facilitated by the aspect that many people can access and download user-friendly and bank-related mobile applications. It is also encouraged by the element that many people can access ATMs to handle their necessary international banking transactions (Baptista & Oliveira, 2015). The major benefit of the technological innovation changes is the cost imperative. The international banks can reduce their operating costs by using the various forms of technological advancements. Through this, they achieve sustained operating cost reduction. The changes also trigger the achievement of new levels of efficiency in the entire international banking sector.
They also enable international banks to facilitate budget accountability in their operations (Laursen, 2016). Based on the changes in cross-border bank lending, this represents the highest form of counterparty exposure. Lessening the regulations entailing cross-border lending may have adverse effects in the international banking. It is worth to note that the cross-border lending changes are closely related to arbitrage regulations in international banking. Cross-border bank lending policies may result to contagion risk among banks from the domestic country and in foreign banks (Borio, 2014). Formulation of strict policies for cross-border bank lending may lead to contagion in international banking. This indicates that technical breakdowns or technical inability to meet its obligations in a single center might spread further to other international banks. Most of the technological innovations utilize the same approaches.
Hence, a breakdown in the technological developments may lead to contagion in international banking. Given that many international banks are transforming from manual systems to automation in the provision of banking services, breakdowns in the technological innovations may result in operating risks (Ali et al. The element of operating risks is in the sense that the banks might be unable to promote specific crucial services to the clients because they all international banks may have shifted to the application of similar technological innovations. Banks should also develop appropriate analytic frameworks to calculate risk, optimize capital and assessing market liquidity and operations (Buch, Bussiere, & Goldberg). The structure can be established by minimizing the effect of market shocks and looking for enhanced arbitrage opportunities.
It can also be facilitated by assessing the impacts of changes in cost and liquidity in real-time so that the banks can act with the necessary precision. Banks should also consider optimizing solutions to their capital and liquidity needs by assessing existing market liquidity and international banking system’s optimization scenarios. These depend on undertaking analyses based on the banks’ complex portfolios, instruments, and positions across numerous global time horizons. In this case, banks should be careful while depending on these innovations. They would prevent operating risks which might affect multiple financial institutions in international banking as a result of depending on the technological changes. It would also reduce contagion by careful consideration on the operations and run of the technological systems.
Further, national governments should place a lot of emphasis on the adherence to cross-border bank lending regulations. These regulations are formulated by the international banking system supervisors, and if followed appropriately, banks would mitigate undesirable effects of the changes in international banking toward financial, economic, liquidity and default risks, arbitrage regulations, and adoption of technological innovation. The international banks and other stakeholders in international banking also have a task of mitigating the potential risks and contagion that might be encountered from changes in technological innovations. References Ali, R. , Barrdear, J. , Clews, R. , & Southgate, J. , & Mehl, A. The global crisis and equity market contagion. The Journal of Finance, 69(6), 2597-2649. Borio, C. The international monetary and financial system: its Achilles heel and what to do about it.
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